D-Street dream run has more legs; IT earnings can be revised upward: TCG Asset Management's Chakri Lokapriya

Time to buy IT on dip?

Dalal Street’s dream run continues unabated, with the Nifty hitting fresh highs almost every other day. With US inflation likely cooling, the Federal Reserve may consider only one rate hike instead of two that the markets were pricing in.

This may boost investor confidence and pave the way for higher highs in the second half of the year, Chakri Lokapriya, managing director and chief investment officer of TCG Asset Management, said in an interview to Moneycontrol.

He also pointed out that the IT sector, which was expected to deliver weaker earnings, has shown resilience amid uncertainty in the US interest rate trajectory. He said IT stocks have the potential for upward revision in earnings later in the year, making them an attractive investment option. Edited excerpts:

US inflation may be cooling and the Fed may just about look at one more rate hike instead of two. If that’s the case, can we clock higher highs?

Yes, you are absolutely right. The whole problem has been around one issue – when does the US Fed start pivoting away from raising interest rates? If the recent inflation print stops the US Fed from raising interest rates, then it pretty much allows the Reserve Bank of India to not just pause but in the coming months start cutting rates against the backdrop of slightly lower commodity prices, even though oil prices are back at around $80/barrel.

The Indian economy is on the mend. Earnings growth has been low for the last three years. So, as earnings recover, the market will continue to rally as we go into the second half. Yes, there may be a bout or two of small profit-taking but I would buy into those.

IT stocks have been on a tear of late. What would you attribute this rally to, given that the street may expect two more quarters of weakness?

Going into the first quarter, the market expected weaker earnings from the IT pack and they have delivered in-line to a slightly weak set of numbers. But more importantly, the weakness is due to the slight uncertainty in the interest rate trajectory in the US. Higher interest rates hold back tech spending and therefore, it also reduces the discounting of capital, it kind of lowers the valuation and so that was holding it back. But now it looks like a temporary issue because the long term still looks good… which means the valuations are attractive for IT, and the second half of the year in the US looks strong. So, I think there is scope for earnings revision upward towards the end of this year for IT companies. Therefore, one should start buying now.

How should one approach online gaming stocks like Nazara and Delta Corp. after the 28 percent tax announced by the GST Council?

These companies can basically operate only in select areas, select geographies. They cannot operate in all states, their revenue stream is therefore restricted. But with the new tax rate, the profitability of that revenue stream has gone down quite a lot. So they need to see a pickup in volume growth, and for that they need to wait for their business to grow substantially, which is a tall task. As a result, their value in the market has decreased… So, they will settle at lower valuations…  we continue to stay away from gaming stocks.

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PVR has reduced food and beverage prices. Will this bite into the multiplex giant’s revenue?

F&B is like a good 30-40 percent of their revenue stream. And so that takes a hit and profitability is also impacted. But content is a cyclical thing, and from that perspective, PVR is still the clear market leader in the country. If you look at stock valuations, they have corrected quite a lot. It's time to start looking at PVR because with festivals coming, new blockbuster and big-budget movies are slated for release as we head into the second half of the year. I think PVR is looking okay at current levels.

Will margins be a setback for banks in the first quarter, given that deposits are still getting repriced?

I think the two-three trends are quite evident in the first quarter. One is loan growth will continue to be fairly strong. Deposit growth will also pick up… but with deposits getting repriced, their net interest margins are likely to come down and in anticipation of that, bank valuations have actually come off.

Federal Bank now trades at close to 1x book value forward multiple versus its traditional range of about 1.3-1.4x. So, this expectation of lower margins has come down. The banks’ provisions are all really strong and NPAs (non-performing assets) are firmly under control. So, after the current round of earnings releases by companies, and the new margins, which will be about 40-50 bps lower than the current net interest margin, it'll be time to start buying the NBFCs (non-banking finance companies) first and the banks a bit later.

What investment themes do you like currently? Would you bet on consumption or would you advise investors to look at manufacturing?

Manufacturing looks very strong at the current juncture. Defence and defence-related companies, companies benefitting from PLI (production-linked incentive) schemes, EMS (electronic manufacturing services) players like Avalon Technologies and companies in that space look pretty attractive. They're expanding capacities very fast, revenues are very strong, their earnings are going to grow north of 30-40 percent. I think that space will see continued business momentum, and therefore, so should their stocks.

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